January 10, 2025
Things I Learned This Week About Resolutions
Happy New Year!!! 2024 was memorable, in ways both good and bad. But it is over now, and, in our industry, we are all wide-eyed optimists so we know that this will be a better year. I hope we are right. It is seen as a “transition” year, as global supply and demand for crude oil and natural gas gets closer to balancing. The adoption of AI in a broader range of our businesses will accelerate. Capital may be more accessible, as demonstrated by pending IPOs in the sector. Diversified lending groups are standing in for the banks of previous cycles, and family offices are still willing to provide equity. Rationalization of assets and operations, continued consolidation and profitability (at any activity level) will be the lead thoughts for many this year. Everyone now realizes that we aren’t going away anytime soon, so since you are going to make it and pull through, you need to plan for the future. That will make it an interesting year. Oh, and the resolution? To be better organized and enjoy life even more!
Peaking? We cover a great deal this week about rising energy demand, compounded recently by AI data center needs, cryptocurrency and the overall rise in expected demand as the population increases. This has an effect on power prices. As a result of the rising demand for power, and the attendant higher costs, we understand that several oil companies are now considering switching, or already have switched from using electric frac crews and going back to dual-fuel options. The goal of E-fleets was to lower maintenance, maintain better control and increase efficiency, and of course, the primary driver – price. Instead of burning expensive diesel, the operator could save operating costs and be more “green” by using E-fleets. But operators always coalesce around price, and now we are seeing power prices change the paradigm. EV sales were still increasing, but we all see the future of EVs as diminished from the expectations of a couple of years ago. E-Fleets are still being built, albeit at a much lower rate, as the overall demand for fracking stalls. But the trend appears to be slowing momentum rather than increasing. We have already seen this in some areas where electric compressors are used in pipeline operations, but when disaster strikes and the power goes off, no gas moves. And our industry is not on the short list to be reconnected, delaying gas use even more. One major was planning on spending $2 billion to move from diesel to electric compressors and that has now been put on hold. Distributed power is still a fast-growing business but maybe not the prime mover of frac activity.
And So It Begins. Flowco Holdings, a provider of production optimization, artificial lift and methane abatement solutions for the oil and natural gas industry, announced it has launched its proposed initial public offering of 17,800,000 shares of its Class A common stock pursuant to a registration statement on Form S-1 filed with the SEC. The IPO price is currently expected to be between $21.00 and $23.00 per share. This would imply a value for Flowco of around $2 billion, with about $300 million in EBITDA. Flowco will trade on the NYSE under the symbol “FLOC.” Proceeds will be used to pay down its current credit facility, redeem certain equity interests from non-affiliate holders, and for general corporate purposes. The company’s products and services include a full range of equipment and technology solutions that enable oil and natural gas producers to efficiently and cost-effectively maximize the profitability and economic lifespan of their assets.
More Deals. Privately held and Midland-based Warren Equipment Company has sold its compression business, Global Compression Services, to a Denver-based private equity firm, Lion Equity. Global is a leading global distributor of OEM and aftermarket parts and components for reciprocating natural gas engines and compressors. Global also manufactures specific components and provides a variety of services tailored to the natural gas sector. “At GCS, we’ve always focused on delivering high-quality products and services that meet the evolving needs of our customers,” said Anthony Speer, Chief Executive Officer of GCS. “This partnership with Lion Equity is an exciting step forward, as their expertise and resources will help us strengthen our place in the market. Together, we will be able to pursue new growth opportunities that will allow us to better service our customers and position GCS for long-term success.” PPHB advised Warren Equipment Company and GCS on the transaction.
And Again. AWC Frac Technology was acquired by Indeed Oilfield Supply, a portfolio company of Pelican Energy Partners. Started ten years ago, Indeed Oilfield Supply is a top independent distributor for pressure control and wellhead equipment with operations in Odessa, Longview, Canonsburg- PA, Minot-ND and Edmonton. AWC Frac Technologies is a 25-year-old company and an OEM specializing in the design, manufacturing and repair of high-quality API 6A frac valves. No terms announced.
Cordoned Off. As had been rumored, outgoing President Biden issued a “sweeping ban” on oil and gas drilling ahead of the Trump administration with an 11th-hour executive action that bans new drilling and further oil and natural gas development on more than 625 million acres of U.S. coastal and offshore waters. Biden said he is using his authority to protect offshore areas along the East and West coasts, the eastern Gulf of Mexico and portions of Alaska's Northern Bering Sea from future oil and natural gas leasing. He invoked the 1953 Outer Continental Shelf Lands Act, which means President-elect Trump could be limited in his ability to revoke the action. This will not be reversed by a mere Executive Order from Trump. “As the climate crisis continues to threaten communities across the country and we are transitioning to a clean energy economy, now is the time to protect these coasts for our children and grandchildren.”
The Industry’s Response. NOIA, the National Offshore Industry Association, where I serve on the Advisory Board, had the following response to Mr. Biden’s actions.
“NOIA Condemns Politically-Driven Offshore Energy Restrictions.” - President Erik Milito. More snippets from Erik below:
“The decision to unilaterally block areas from future offshore oil and gas development is a strategic error, driven not by science or voter mandate, but by political motives. This move directly undermines American energy consumers and jeopardizes the vast benefits tied to a thriving domestic energy sector.”
“Such moratoriums threaten our economic and national security by creating political barriers to our own resources. Even if there's no immediate interest in some areas, it's crucial for the federal government to maintain the flexibility to adapt its energy policy, especially in response to unexpected global changes like the Russian invasion of Ukraine. Blanket bans only serve to transfer energy production and economic opportunities abroad, inadvertently bolstering countries like Russia at the expense of U.S. interests.”
“NOIA will work with the incoming Trump administration and Congress to reverse this ill-conceived policy, advocating for a balanced, pragmatic approach to offshore energy that promotes both our energy independence and economic growth.”
Shameless Begging. My son, Henry, is a junior in the Leeds Business School at the University of Colorado. His major is finance, and he is taking two accounting and two finance courses this semester. I am, of course, highly prejudiced, but he is a bright kid. He is in the top 1% of people in the world in solving the most difficult Sudoku puzzles made. He is president of a large club at school with a budget of thousands. Internships in Boulder are rare, and I would love to have him in Texas this summer. If anyone might be able to use a bright and eager intern, I think it would benefit all involved. His resume is available from henry.wicklund@gmail.com or by text at 214-663-4156. The picture below is from this week’s trip to Machu Pichu.
Power Conference. A couple of weeks ago, ProPetro announced it was going to spend ~$120 million on a new power division, resulting in a 14%+ upward move in the stock. Now, Liberty, a Denver-based pressure pumping company that has already formed Liberty Power Innovations, has executed an MOU with DC Grid, a “pioneer” in off-grid modular direct current (DC) power systems. The goal is to deliver advanced power solutions tailored to address the growing energy demands of industries such as commercial fleet electric vehicle (EV) hubs and data centers. The DC ecosystem provides higher power conversion efficiency with a simplified architecture that reduces energy consumption and emissions. According to the release, small-scale power output can be deployed within three months for fleet EV charging hubs, while hundreds of megawatts can be deployed within 12-18 months for data centers. Liberty’s low emissions mobile power generation provides outstanding thermal efficiency and fuel flexibility, including natural gas, RNG and hydrogen. It is a modular design that can be scaled alongside the growing load requirements of a customer. This is intended to capitalize on the very fast-growing market of supplying power, which is a very clear and growing trend.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $73.24 per barrel (down ~1.0% week-over-week) and natural gas is $3.24 per MMBtu (up ~9.8% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.6 MM BOPD (up ~2.8% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 1.0 million barrels week-over-week vs. an estimated decrease of ~1.8 million barrels.
Frac Spread Count: There are currently 201 frac spreads operating in the U.S. (no change in spreads week-over-week).
Onshore Drilling Rig Count: There are currently 573 drilling rigs operating in the U.S. (no change in rigs week-over-week).
Technology. Halliburton and Coterra Energy launched a new autonomous hydraulic fracturing technology called Octiv® Auto Frac service, which automates stage delivery execution. Historically, fracture decisions were managed manually while pumping, but can now be configured to execute designs to their specifications and automate the entire fracture process. The initial rollout of this service led to a 17% increase in stage efficiency. Technology marches on.
Snippets. Noble wins an $84 million contract with Petrobras for work in offshore Suriname, with the Noble Developer rig slated to drill three wells starting in mid-2025. The Exxon work in nearby Gyana has been a mainstay for Noble for a couple of years now and they look to continue their streak.
Consolidation. The U.S. Energy Industry has defied expectations that declines in drilling and completion activity would quickly result in lower production. Technology has turned that paradigm on its head in recent years. To continue that trend, and make it most effective, the industry needs further consolidation. While the input company names are too small to read, look at what happened in the defense industry. We need to do the same.
Recap of Last Year. What does 2025 hold in store? Citi Research analysts shared their top 20 large-cap stocks. As of the end of December, this list outperformed the S&P 500 by about 5.2%. According to Citi’s 2025 Outlook Roundup note, analysts expect the bull market to continue, however entering “a more volatile phase.” “We are believers in structural trends and productivity gains that should support index fundamentals,” said the U.S. equity strategist at Citi. “However, we also acknowledge that markets are pricing in a lot of good news per valuations, including our non-traditional metrics and sentiment gauges.” Only energy name on the list? SLB.
NAPE. The North American Prospect Expo (NAPE) has grown to be on the most important and well-attended energy events. It is no longer just E&P companies looking for partners and investors, it is now a three-day business meeting covering all things Energy. February 5th through 7th is the time frame. The Energy Business Conference (EBC) takes place February 5th, where I am flattered to be moderating a panel that is scheduled to include Chris Wright, the expected incoming head of the Department of Energy. There are a number of very interesting people and topics. Government Affairs is Friday, and the exhibits are February 6th through 7th. Over 8,000 people are expected to attend. Go to https://napeexpo.com/summit to learn more.
Banking Zero. Several years ago, the major U.S. banks joined the Net-Zero Banking Alliance, part of the ESG wave that was sweeping the industry. The U.S. President, the UK Prime Minister and the Head of the UN, had all been making the case that financial institutions should quit financing oil and gas activities in order to save the planet. Members agreed to “align lending, investment and capital market activity with net zero greenhouse emissions by 2050. And while hundreds of billions have been spent on EVs, wind and solar, total emissions continue to increase, all while the oil and gas industry has been getting cleaner and more efficient. We are now producing more natural gas with a rig count of 120 than 15 years ago where it took 1,600 rigs to produce less. That takes a huge amount of emissions out of the equation, though we get very little credit. But as with the reduced emphasis on DEI and ESG, the Alliance has fallen apart. J.P. Morgan has joined with Citigroup, Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs in quitting the Alliance, all since the beginning of December. ESG isn’t dead. Sustainability will continue to be a reported issue, but the severity is lessened, and the DEI that highjacked the ESG effort will fade even faster.
It Isn’t Just Banks. We have seen major oil companies such as Shell and BP do some backtracking on their promises of a big green initiative. Banks, as noted above, are backing away as well. And now, entire governments are getting in on the act. The UK has gone from a 100% renewable goal to 95% and is headed further south. Industries that generated 80% of emissions employ 7% of the workforce, who are relatively higher paid with relatively lower educations, and green jobs require a pay cut. Reality is setting in. Belgium was going to close its nukes this year but, upon reflection, decided to wait ten years instead. Germany might not be in recession if it hadn’t closed its nukes. We will continue to live in a “climate emergency” world for several years, and with Mr. Trump as president, activists will likely get even louder. But the reality of their cause is being better understood now, sidelining much of their arguments among thinking people. Net zero is a great long-term goal. It is like my New Year’s resolution; the same one I have had for 30+ years – to get more organized. I get better at it, but you would be hard pressed to believe that when looking at my desk. With the exception of China and India, and their coal fired plants, we are on a path towards cleaner and lower emissions efforts by all, but that doesn’t mean immediately or even ever. Just better. Like most of my resolutions.
Ouch. From Landman – Lawyer renting a car. “I don’t want the Mercedes, I want something less conspicuous.” The Rental guy responds: “It won’t be conspicuous in Midland. Just don’t go to Odessa”
Pick That Up. So, how many forklifts do NOV, FMC or any of the other large companies use? Moving large and heavy loads of equipment and pipe is a core part of what we do, and historically, forklifts have been the answer. Forklifts were one of the first industrial pieces of equipment to switch to natural gas as a fuel source, and battery power has been making inroads. But that assumes forklifts will still matter. Can’t do without them you say? The numbers disagree. 7,500 people are injured and almost 100 killed by forklifts each year and we are the industry most focused on safety. Retail orders for forklifts dropped by 28% in 2023, the biggest drop in 14 years. Overhead cranes and hand-pushed electric pallet jacks are considered safer and are taking share. Clark is credited with inventing the forklift over 100 years ago and they have been a mainstay in manufacturing. Everyone from Whirlpool to Tesla to Mercedes have all been phasing them out. Interestingly, the shift to boxes instead of pallets is also facilitating the change, and the Toyota forklift division says that “transformational changes are coming in the next 5-10 years.” Whenever I hear that, I think 3-5 years. Makes one think.
I Wish I Was That Smart. Our current, and outgoing, Secretary of Energy is Jennifer Granholm. She was governor of Michigan for eight years. After serving as governor, she became a managing partner of Ridge-Lane LP, a strategic advisory and venture development firm. She also taught policy at the Goldman School of Public Policy at UC Berkeley, was a senior research fellow at the Berkeley Energy and Climate Institute (BECI) and a senior fellow at the Berkeley Center for Information Technology Research in the Interests of Society. She has a law degree from Harvard. She is obviously an intelligent woman. So, when she said that we already “have approved more than sufficient capacity to meet global demand for U.S. LNG for decades to come,” you have to wonder. So, future power demand will be met by sources other than natural gas? Wind? Solar? Coal? Of course, one of her studies shows that global power demand is peaking and will decline. Soon. Any day now. Really? Another billion people over the next ten years, all wanting and using the technologies used today? If there was another reason for “regime change” in the U.S., it is from this. It turns out that President Biden didn’t pause LNG development plans as an environmental gesture. He wants to close down any future LNG development, and his Secretary of Energy agreed. They all need to watch a couple of Scott Tinker’s videos. Get educated. But that is someone moot now and soon we won’t have to think as much about it as they all recede into the rear-view mirror. We still have those highly educated political science majors to contend with, but from the other side of the fence.
Cut Off. Two years ago, after the Russian-Ukraine war started and Russia dramatically curtailed natural gas sales to Europe, the fear was that a colder than average winter would have Germans burning furniture to stay warm. Instead, the next two winters were unseasonable mild. That looks to end this year, as Europe, like the U.S., is seeing severe cold weather. And while supply lines have been shifted, with the U.S. now supplying about 19% of Europe’s natural gas demand, it should soften any blow. But any Russian gas that was still coming into Europe has now been shut down, since Ukraine refused to extend a pipeline gas transit deal for a line that travels across their territory. While Russia is losing market share and will lose money, the real impact could be felt across the EU. Countries like Germany didn’t need to upgrade facilities since its access to cheap Russian natural gas was considered a given. Now that it isn’t, and with Germany in recession, retooling a manufacturing economy to offset the lack of, or cost of, natural gas can’t move ahead. And if the cold winter persists, the biggest issue may be whether Grandma’s table goes into the fireplace.
Snippet. Meta, known to all of us as Facebook and Instagram, announced that it was ending its “fact check” effort that was put in place during the first Trump term. With no comment, snide or otherwise, about his inaugural donation, or change of heart, their was one thing that struck me most. Meta employs 40,000 people to fact check. Forty thousand people. Geez. But I feel they will have no problem getting new jobs. There are lots of openings in DEI. Oh. Wait. Never mind.
Politics. U.S. Steel used to make most of the steel in the world. That has obviously changed and now it produces about 6.6%. Facilities have aged with not enough money to retool, something that Japan’s Nippon Steel promised to remedy once they had acquired the company. They promised to uphold the union agreements, not dump steel into the U.S. and breathe new life into the company. The problems? The name and the unions. If it were Wicklund Steel, the deal would have been approved. If the union leaders were actually acting in the best interests of their members, they would have endorsed the deal. The early idea of combining with another U.S. steelmaker, Cleveland Cliffs, sounds great, except they would have 100% of the U.S. market and Cleveland’s market cap is now below that of U.S. Steel. And size aside, they don’t have the financial ability to buy it, much less modernize its facilities. This was an absurd decision. It is Japan, a solid partner, not China. Instead of shedding jobs, which is now a must do, an acquisition by Nippon would likely result in a rise of employment. Politics never saw a good deal it couldn’t screw up, but this one is epic.
Love the Headline. “Ukraine Advances Killer Robot Drones.” The methods of waging war have changed.
Headline: Aging U.S. Sale Impedes Trump’s Oil Plan. Now, none of us in the business really expected “drill baby drill” to actually happen. We are drilling at the economic limit of current oil prices and Trump wants cheap gasoline and cheap energy. So high oil prices are not good, but needed, to see activity move up, and the likelihood of subsidies is exceptionally remote. Approving the permitting and building process would help a great deal and as more LNG facilities come online, natural gas demand and production will increase and the pipelines from the Northeast to the Gulf (of America!) Coast will be needed, and all of that is positive, but a long way from “drill baby drill”. The point was that wildcatters are gone, replaced by disciplined businessmen who understand the need to generate positive returns. The other issue is the recent wave of consolidation. Today, Diamondback, Exxon and Oxy are the big dogs on the block, and while they talk about boosting production, there are a great deal of smaller players who will be challenged. I am of the opinion that we don’t need “drill baby drill”, but approval of pipelines and LNG facilities, which, as it turns out, the Biden administration was much more interested in shutting down than we realized, will be plenty. Demand for energy will continue to advance. That is a given. Where the energy and power comes from will continue to be “all the above,” but the fossil fuel business is not even close to going away for a very long time. Discipline matters more than a politician’s comments.
Snippet. In what can only be termed a surprise, the new Syrian Islamist rulers have chosen a woman to head the central bank. No wonder we let the wives pay the bills.
Biden bureaucrats leaving their jobs on Jan. 20.
(I’m a Monty Python fan!)
War. Gaza, Syria, Ukraine and Iran get all the war headlines and the protests. While few were paying attention, Africa is falling even farther into trouble. There have been more than 32 million people displaced due to the myriad of conflicts, with Sudan and South Sudan representing over 12 million. South Sudan has displaced more than 42% of its total population (it should be noted that 90% of South Sudan’s revenues come from oil production, the famous “Oil Curse”). Somalia has displaced almost 40%. Norway’s Peace Institute counts 28 state-based conflicts in 16 of Africa’s 54 countries. Another source counts more than 35 active armed conflicts in Africa, with major ongoing conflicts in countries like Sudan, Ethiopia, Mozambique, Somalia and the Central African Republic, where multiple armed groups are involved. Nigeria, Ethiopia, Egypt, South Africa, Tanzania, Kenya, Uganda, Sudan, Algeria and Morocco were among the top 10 most populous countries in Africa in 2021, in that order. Nigeria has about 210 million people and Egypt is in 3rd place with half that number. Millions are dying of both war and famine. I haven’t seen anyone protesting anything about this, even though many of these countries are Muslim as well. If it’s not a headline, it must not be happening, right? No. Wrong.
China and Its EVs. China set a record for EV sales last month, thanks to hefty promotions, incentives and the threats by the government. The focus has been on Chinese-made EVs, which is why you have seen Volkswagen and Mercedes take billions in charges and reduce their exposure to the country. China continued to make EVs just to keep the economy afloat, incurring a great deal of debt along the way. And now, they want to sell those cars in Europe and the UK. The world’s largest car maker, Volkswagen, is laying off workers and closing facilities for the first time in its history. Between countries mandating that manufacturers make cars no one wants, and China producing to keep people employed, the future is opaque. Non-economic manufacturing rarely succeeds for long and we are several years in. Many of the non-Chinese manufacturers are still losing tens of thousands on every EV they sell, and with demand peaking and headed down, it makes it tough to make up the losses with volume gains. China is in a big economic crisis with recent dissenting economists now being jailed for speaking out. A desperate China is a scary thought for all. And while the world won’t turn on the success of EVs in the global marketplace, the contribution it is making so far has yet to be seen.
Any and all comments, arguments and rebuttals are welcome!
In addition to my association with PPHB, I serve on three private company boards. Merit Advisors is a property valuation company and I have long been a fan of optimizing how a business is run, not just the tools we make. Merit is in the business of savings companies’ money, actual cash, by doing a much more in-depth and realistic view of equipment and reserve valuations and I am very impressed with their work. I am also on the advisory board of Preng & Associates, a leading executive search boutique that specializes in all things related to Energy & Power. Nova is a gas compression company run by a very dynamic CEO with a very strong board and ownership.
I serve on the Advisory board of the Energy Workforce & Technology Council (formerly PESA), the National Ocean Industries Association (NOIA), and the Maguire Energy Institute at SMU my alma mater.
jim
214-755-3914 | james.wicklund@pphb.com
Leveraging deep industry knowledge and experience, since its formation in 2003, PPHB has advised on more than 180 transactions exceeding $11 Billion in total value. PPHB advises in mergers & acquisitions, both sell-side and buy-side, raises institutional private equity and debt and offers debt and restructuring advisory services. The firm provides clients with proven investment banking partners, committed to the industry, and committed to success.
